If memory serves, Stan ordered a bowl of fruit.
The year was 1985 – or thereabouts – and I found myself having breakfast at the Racquet Club in Manhattan with Stanley Druckenmiller.
Readers will likely recognize that name. Druckenmiller has gone 30 straight years with an average annual return of 30% or more. Today, he is rightfully known as one of the all-time greats.
But at the time, he was mostly unknown.
During the breakfast, we talked about markets, our work, and where stocks might go next. I came away from the breakfast with a profound respect for the man. And it’s why I’ve followed his work so closely ever since.
And it’s also why a recent comment of his caught our attention.
“You Can Have Your Head Handed to You”
In a recent interview with Bloomberg, Druckenmiller said:
If I look back over the last 40 years, I’ve never had a down year, but I’m not sure I’ve ever made money in shorts. I like it. It’s fun, but you can have your head handed to you.
If you’re dead wrong on a long, you can lose 100%. If you’re dead wrong on a short, you can lose ten times.
For the uninitiated, short selling is when an investor borrows shares and sells them on the open market with the intention of buying them back at a lower price. In simple terms, it’s a way to profit from a falling stock price.
As Druckenmiller alluded to, it’s a practice that most investors will avoid altogether. And under normal circumstances, that would be sound advice.
But I’ll respectfully disagree on one point: Short selling is not necessarily the risky proposition most think it is. And when done correctly, it can be very lucrative.
Let me show you…
Repeat Winners, One Stock
From January to mid-July, shares of Tesla (TSLA) soared some 138%. The bulls must have been cheering. After a harrowing 2022, it seemed the boom times had finally returned!
We have no doubt that plenty of long-only investors piled in near those highs. And they’re likely regretting it.
As we write to you, TSLA has fallen some 30% since those mid-July highs. In other words, investors buying in near the top have lost roughly one-third of their investment in four short months.
Our readers took a different route.
We initiated a series of strategic short trades starting in June. And the results speak for themselves:
June 16–June 26: 7.7%
June 16–July 6: -3.13%
July 7–August 15: 16.77%
July 7–August 16: 18.93%
September 15–September 22: 10.2%
September 15–September 25: 13.7%
$5,000 invested into each leg of these trades would have netted an investor $3,210. By comparison, a long-only investor would be down somewhere between 25% and 30% with TSLA over the same period.
And we’re proud of the fact that readers were able to see these returns with no leverage and with very tight protective stops.
This isn’t to say that shorts are always the best way to see returns. But as you’ve seen, short selling can be a useful tool in an investor’s arsenal.
Why would we dismiss it altogether?
More importantly, if our long-term forecast is correct, short selling may prove to be one of the best ways to profit in the years ahead.
The Cycle Comes Around
For the past decade or so, investors could comfortably ignore short selling.
From the depths of the financial crisis, markets enjoyed a tremendous bull run. The S&P 500 returned 149% over the past 10 years alone.
In such an environment, the strategy was simple.
Buy stocks. Hold them. Forget the shorts.
Sadly, we believe those days are over.
We got our start in finance after graduating from Harvard Business School in 1972. We could not have picked a more treacherous time to begin our journey as a professional investor.
From January of 1973 to the end of 1983, the Dow Jones climbed some 30%. But this nominal figure hides an uncomfortable reality. Adjusted for inflation, the Dow declined by some 50% over those 10 years.
For the long-only investor, that’s a decade of heartbreaking real losses. For many of us, it’s unthinkable today.
Living and investing through this period, we remember the vicious countertrend rallies and the cautious optimism they instilled. And we remember the dashed hopes when the rally would fail and reverse.
Most of all, we remember the persistent sideways-and-down movement of the markets that lead nowhere and massacred many portfolios.
It is our firm belief that – like the wind and the tides – markets move in cycles. And we believe the cycle has come around to “replay” the treacherous ‘70s and early ‘80s.
We don’t say this to alarm you. But it is alarming.
Just for a moment, consider what it would mean if we’re right.
Can you really afford to go an entire decade with absolutely nothing to show for it?
The Four Commandments of Short Selling
We predict the buy-and-hold investor will be sorely disappointed in the years ahead. Meanwhile, the nimble trader willing to go short as well as long will prosper.
We understand this will be a new idea for most. Even in our research service, New Paradigm Research, several readers wrote to us saying they had never sold short a stock. Many more were hesitant to do so.
We’ll tell you what we told them.
When done responsibly, short selling can be an incredible tool for investors. But with all things, you must have a strategy. Here are our four commandments for short selling:
Shorts are always a trade, never a long-term hold.
An investor must identify a near-term catalyst that will push a stock lower. This might be important resistance levels in either price, time, or both. We share this type of analysis in our service.
An investor must identify their protective stop, ideally a tight one near resistance.
An investor must know their profit-taking objective before ever placing the trade.
If an investor cannot follow these commandments, then they have no business shorting stocks. But if we can adhere to these rules, we believe you’ll be pleasantly surprised by the results.
And one more thing before you go…
It is our firm belief that we are entering a new paradigm, and it will require a new type of investor. The strategies that served investors well for decades will not perform in the difficult years ahead.
That’s why we’re hosting a special event tonight at 8 p.m. ET. At the event, we’ll share our full prediction, including specific dates investors need to prepare for.
The first one is November 22. That’s when we expect a market event to kick off that will catch everybody by surprise.
What is this event? And how do you prepare for it? We’ll reveal everything tonight. You can reserve your seat with one click right here.
Editor, New Paradigm Research